Category Archives: Economics

The Pension Bomb

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Some smart guy supposedly said that democracy works great until the people learn how to give themselves a raise from the public treasury. It is one of those quotes attributed to famous people, even though it is clear they never said it. Reagan used to use the line a lot, but he is certainly not the source. Wiki blames urban legend and maybe some obscure guy from the 1940’s.

The source is not important as the sentiment is obvious. Once you start taking money from one person or group and give it to another citizen or group, you open the door to institutional robbery. Or, as some other unknown smart guys said, “A government that promises to rob Peter to pay Paul will always get Paul’s vote.” Another formulation of this is the tragedy of the commons.

That’s been the dynamic of America’s experiment with social democracy since the end of World War II. One party promises to rob one group of Americans and give some of the proceeds to another group of Americans. The game is to either fashion a majority of Peters on the promise of defending them from the Pauls, or, fashion a majority of Pauls promising to rob the Peters. When in the 1970’s it became clear that Thatcher was right and you do eventually run out of Peters to rob, we started robbing the unborn Peters through debt and money creation.

Now, it looks like we are running out of unborn Peters. The public pension time bomb is about to blow apart the present arrangements, but no one has any idea what to do about it. It is a straight forward math problem. The possible outcomes are known and few are good. Maybe if there is a miraculous change in demographics and asset values, everything will work out just fine. More likely, Detroit is the rosy scenario. As this story in City Journal explains, restructuring pensions plans is just about impossible.

When unions agreed to a deal last month with Detroit city government to freeze the city’s underfunded pension system and create a new, less expensive one, some experts hailed it as a model that other troubled cities might adopt. News reports prominently mentioned governments with deep retirement debt, including Chicago and Philadelphia, as candidates for similar reforms. But the agreement came about under a Michigan emergency law that applies to struggling cities like Detroit, which is in bankruptcy. In many states, by contrast, local laws and state court rulings have made it virtually impossible to cut back retirement benefits for current government employees, even for work that they have yet to perform. These state protections, which go far beyond any safeguards that federal law provides to private-sector workers, are one reason why so many states and localities are struggling to dig themselves out of pension-system debt, amid sharp increases in costs. It will take significant reforms to state laws—or bigger and more painful bankruptcy cases—to make a real dent in the pension crisis.

This may be a good thing. The problems created by the people of Philadelphia should be shouldered by the people of Philadelphia. The state or federal government riding to the rescue just encourages more of this stuff. Plus, the people of these localities will feel the effects of their political choices. Maybe they make better choices going forward.

The Detroit plan, negotiated by unions with the city’s emergency manager, Kevyn Orr, freezes the city’s current underfunded retirement plan so that workers will receive benefits for new work at a reduced rate. Under the old plan, an employee who worked for the city for 35 years and retired at 62 with a final salary of $60,000 could qualify for a pension of nearly $40,000. By contrast, if that same employee works the final ten years of his career under the new plan, his annual pension would be about $35,000. In addition, if the new plan becomes underfunded, the employee will have to contribute more of his own money to help cover the costs.

Detroit’s reforms aren’t unusual by the standards of the private sector, where a federal law, the Employee Retirement Income Security Act (ERISA), governs pensions. That legislation protects the benefits that a worker has already earned but allows employers to amend a pension plan for work that’s not yet been done, a move that can immediately reduce costs. Workers have the option of seeking employment elsewhere, of course, if they don’t like the new terms.

But federal law doesn’t apply to municipal retirement systems created by state legislation. In about two dozen states, courts have declared that laws creating pensions represent a contract between an employee and government whose benefits can never be reduced once a worker enters the retirement system. Many state courts—including those in Pennsylvania, Arizona, and Colorado—have been influenced by a series of California legal decisions (often referred to, collectively, as the “California Rule” on pensions) which hold that the pension contract begins immediately upon employment, and that the terms of a government worker’s pension can only change if the alterations are “accompanied by comparable new advantages,” or benefits. The California Rule, University of Chicago legal scholar Richard Epstein has written, “Neuters the power of local governments to alter and amend, by wiping out all government flexibility to correct prior errors in pension program design or funding.” One result, he observes, “is a financial death spiral” in many municipalities.

The proper term for this is “suicide pact.” That’s what these states have created. A city that cannot raise taxes to pay its bills has to cut spending. If they are prohibited from cutting these pension deals, then they must cut other stuff. Fewer cops and fewer bureaucrats probably sounds good to libertarians, but they have never been to places like Philly or Baltimore. Fewer cops and fewer locals on the city payroll means my neighbors are coming to your neighborhood.

We see that spiral in California, where a number of municipalities entered bankruptcy in recent years, thanks in part to their inability to alter their unaffordable pensions. Courts, meanwhile, have short-circuited reform attempts. Voters in the city of San Jose, where pension costs have risen to $245 million, from $73 million in 2002, passed a ballot initiative in 2012 installing a new, less expensive pension system. But in December, a California judge invalidated the key changes, based on her interpretation of state court precedents.

The decision leaves California municipalities facing a bleak future. From 2006 through 2013, local governments that participate in the giant California Public Employees’ Retirement System saw their annual pension costs double, on average. Last year, the CalPERS board voted to require an additional contribution increase of 50 percent, phased in over five years. “While there is time to plan for the increase, the most fiscally stressed municipalities could find the increases unmanageable,” Moody’s wrote. Meanwhile, California governor Jerry Brown has signed off on another plan to rescue the state’s struggling teachers’ pension fund by requiring school districts to increase their annual contributions from $2 billion this year to $6 billion over the next seven years.

At some point, the money runs out and there’s no way to hide it. The outflow of tax payers from California is going to accelerate. Eventually, the pols will have no choice but to turn on the rich of San Francisco and Los Angeles. That will be fun to watch, but rich people only respond to force, so they will not pay up no matter how much the politicians complain. It will have to get very ugly first.

Legislators in Illinois have taken a different approach. Their state constitution bans changes to pensions, and costs have soared for both the state and its municipalities. Last year, legislators passed changes in defiance of constitutional protections, arguing in court that the state faces a “severe financial crisis” that makes reform “a valid exercise of the state’s reserved sovereign powers.” Unions are now challenging the reform law, and if they succeed, Illinois faces a $187 billion pension tab—equal to more than four times its revenues—with no plan to reduce the debt.

Illinois has lots of company. Without some way to amend the terms of retirement plans, states and municipalities groaning under the so-called California Rule face years of increasing costs and pressure on budgets that inevitably mean higher taxes and fewer services—in other words, the worst of both worlds.

Illinois will never pay those debts. In fact, none of these states with swollen pension obligations will pay those debts. Then we will learn that economists were wrong about public debt. For decades they have been arguing that debt has no negative impact of economic growth. In fact, they have consistently argued that debt boosts growth. That’s true until the point when the debtor cannot pay his debts. Then the whole thing collapses into an Argentine crisis.

That’s always been the big lie within modern economics. Debt and money creation are nothing more than the pulling forward of revenue. If you imagine a nation’s economy as a balance sheet, raising debt to fund current consumption is a zero sum game. It is just an accrual. You artificially increase revenues today, but that entry is reversed out down the line, when the debt is repaid. Our decreasingly robust recoveries from recessions are due to the metastasizing debt.

What happens when the retirees learn they will not be getting paid is not entirely unknown. They will default on their debts. The people holding those debts will follow suit. If a state like California does default on its debts, things will get very ugly in America. There are simply too many people depending on those debt payments for there to be no serious consequences to the economy at large.

I’ve often thought that the next constitution will have a few provisions in response to the inevitable debt crisis that is coming our way. One is there will be serious limits on government borrowing. Frankly, outside of war, the Federal government should never be borrowing. At the state level, debt should be limited to asset backed lending. The state pledges a bridge or road as collateral. Otherwise, government is prohibited from issuing debt.

The other change is that citizens vote where they are born. The people of California who voted for lunatics are the real problem. They should not be allowed to move to a neighboring state and begin ruining their new home by voting for lunatics. Look at the states ruined by Californians moving away from their mess. Oregon, Washington, Colorado, New Mexico used to be sensibly run states. New Hampshire was ruined by lunatics from Massachusetts. Vermont was ruined by New York lunatics.

The Parasite Economy

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I read a lot of econ stuff, mostly for entertainment purposes. That habit started back in the go-go 90’s when the new economy was belching forth one new dot-com firm after another. Most of these new companies made nothing, fixed nothing and provided no service anyone would want. The dot-com boom was, in many respects, a big waste of time and money. But, I got a lot of laughs listening to lectures about how things were different in the new economy.

After the crash and the dust settled, we were left with a parasite economy. By that I mean the only people making money were doing so by leeching off of someone doing real work. Google is a case in point. A search engine is not much use without the infrastructure of the Internet and the billions of content providers. Google provides nothing, other than a convenient way to find some of the sites. Mostly what they do is operate as a protection racket.

It used to be that if you built a better mouse trap, the world would beat a path to your door. Today, building a better mouse trap means a whole bunch of freeloaders and highwaymen litter that path to your door, robbing all those folks trying get your better mousetrap. Television is a good example of this. It used to come over the air free. Now, you pay the cable guy and then you pay the tax man for the abatement the cable company needs. You have to rent a special box and maybe sign up for other services like telephone and Internet to get television.

Maybe it has always been thus and I’m just catching on now that I’m in my old age, but that’s what came to mind with the news the court was busting up Aereo. Conceptually, I love the idea of local channels over the Internet. I’ve moved around a lot and getting the home town news, for example, would be worth a  few bucks a month. Getting the local football games or hockey games, even though you’re not local, would be great. The technology to do it is in place and mature, but the local broadcasters don’t do it. That’s where Aereo thought they could make some money.

That’s also where the problem starts. They don’t own the internet and they don’t own the content. They were borrowing it and renting it out to their customers without getting permission from the owner. That’s generally called theft, but in the new new new economy, it is called “disruptive.” The court called it illegal and our nine robbed masters are the final say in the matter.

That may or may not be the right answer, but there’s no doubt that Aereo is (was) a parasite company trying to make money from other parasite companies. The local broadcasters get special rights not available to everyone. They strike deals with the cable companies who have struck special deals with state and local government. Between you and the guy making your favorite show is a long line of rentiers. I spend more in a month on telecom than my father spent in his lifetime.

Now, that’s not to say no one is doing real work. It’s just that the big money seems to be in coming up with a way to transfer your cost of doing business onto others and charging rents for access to the work of others. Facebook is a great example. They don’t pay a dime to the ISP’s and telcos. You pay for the mobile access and you pay for the Internet. They harvest your personal data and sell it to others. Their big contribution is to provide a crude interface for you to see pictures of the grandkids.

It’s all perfectly legal and maybe even moral. I don’t know. I do know you can’t have an economy based on it. Someone has to be making stuff and fixing stuff. Someone has to actually be making better mousetraps. Instead we have our best minds working on new ways to charge you for television. At some point, the system has to be overloaded with middle-men, rentiers and scammers.

The Vice Economy

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Casino gambling is going to make for a good book one day. I’m sure lots of books have been written on the subject from all angles, but the one containing the epitaph is still unwritten. Way back in the olden thymes, Las Vegas was the one place to legally gamble. That meant that most people did their gambling illegally.

Now we are up to our eyeballs in legal casinos, often run by the state. The argument being that it raises money from a bad thing to be used for a good thing and it cuts down on crime. Whether any of that is true is debatable, but what is certainly true is the casino business is in trouble. This story from Atlantic City is a pretty good example.

The Revel Casino Hotel warned its staff Thursday that it will shut down this summer if a buyer can’t be found in bankruptcy court.

In warning letters given to employees and obtained by the Associated Press, Revel said it is seeking a buyer for the struggling $2.4 billion casino, but can’t guarantee one will be found. If not, employees could be terminated as soon as Aug. 18, Revel said in the letter.

“If Revel is unable to complete such a sale promptly, Revel expects to close its entire facility,” the letters read. The company also said it plans to stay open while it searches for a buyer.

Shortly after distributing the letters, Revel filed a Chapter 11 petition in federal bankruptcy court, its second in as many years. Revel said it hopes to find a buyer quickly.

“We will work to reach an agreement with a new owner who will help ensure Revel’s long-term financial stability and who shares our commitment to providing Revel’s guests and players an exceptional experience,” said Scott Kreeger, Revel’s president and chief operating officer.

He said the casino has obtained a $125 million loan from one of its existing financiers so it can operate during its stay in bankruptcy court.

If you have never been to Atlantic City, here’s a quick primer. Imagine a bombed out ghetto city like Detroit or Newark. Place it next to a decent beach with a boardwalk and then plop some tacky casinos and you have Atlantic City. This particular casino was built far from the massive ghettos that bound the boardwalk area. In theory, it should be thriving, but it is not. In fact, all of the casinos in AC struggle.

One reason is the surrounding area. The big mistake was not pushing out the locals when they built the casinos in the 1970’s. But, that was before liberals figured out how to use gays and Mexicans to clear out a neighborhood and gentrify it. Back then they still thought they could fix the ghetto. The other reason for the failure of AC is the casino boom. In fact, we may be reaching peak casino.

Racetrack casinos used to contribute as much as $240 million a year to Delaware’s tax coffers. But as the Northeast becomes saturated with gambling venues, the state’s casino revenue has tumbled, prompting a new industry request—for a tax break.

“It’s a different world for the Delaware casinos,” said Democratic Gov. Jack Markell, who supports reducing the tax burden on casinos by $20 million a year to help them compete.

More casinos have opened in the Northeast over the past decade than in any other part of the country, and the expansion is causing upheaval in the region. States that adopted gambling earlier than their neighbors, such as Delaware, New Jersey and West Virginia, are watching dollars drain away, and new projects have some wondering how many facilities the area can support.

Twenty-six casinos have opened since 2004, fueling a 39% increase in total annual gambling revenue in the mid-Atlantic and New England, according to a study by the University of Nevada, Las Vegas. Within 100 miles of Philadelphia, there now are 24 casinos, a big shift from the early 1990s, when Atlantic City, N.J., enjoyed an East Coast monopoly. At least a dozen more gambling spots are in the pipeline from Massachusetts to Maryland, raising fears in states such as Rhode Island that their casino tax windfall is at risk.

This is a familiar pattern. A truly new product pops up creating a new industry. Once it is clearly a winner, others rush in to get a bite of the apple. Supply shoots up, prices collapse and the product becomes a commodity. That’s followed by a culling of the supply herd. Cheap money fuels consolidation so eventually you end up with a handful of suppliers of the product, who can make low margin businesses work on volume.

The question is what comes next. In every other business a few operators emerge as the apex predators to gobble up the rest. That can’t happen with state run gambling parlors. Some will go this route where private operators run the casinos and pay a special tax to the state. That either means the state takes a smaller cut or they find a way to turn the operator into a utility, which seems unlikely.

There are two other models that could be the end game. One is the nationalized business model. In the old days it was popular in Europe for the state to take control of whole industries like steel and energy. By the 1970’s these industries were money losing disasters threatening to bankrupt the state. They were privatized and in many cases sent overseas. Decades from now states will probably be unloading these white elephants for pennies on a dollar.

The other model is pornography, which has followed an interesting path. The Internet gave new life to an industry largely run by degenerates and gangsters. It suddenly got cool and it got rich. But, the same tools that opened it up to professional business people opened it up to global competition. Revenues collapsed as amateurs started giving away their porn on the Internet. The “adult bookstore” followed Blockbuster Video into the great abyss.

Gambling can be done on-line. Not all of it, but poker, sports books and other, as yet uninvented, games can be done effectively on-line. Prohibitions against on-line gambling will work for a while, but getting around these limits is getting easier. I know poker players who belong to private on-like clubs, using gaming consoles. It will not be long before a clever guy figures out how to “monetize” this.

Gambling has been a part of human societies since at least settlement. The thing is, there’s little value added opportunities in it. You can build a four-star hotel on a beach and make big money. Other than offering drinks, safety and volume, a casino is not offering a lot to the gambler. They are not there for the shows or the atmosphere. They are there for the action. That means these state gambling parlors will see their margins drop to the absolute minimum, with many going bust in the next decade.

There’s always been something dodgy about government running the vice rackets. In America, the Federal government runs the alcohol business. They make more from it than the private players. Alcohol is taxed at over $20 per gallon. The states run the cigarettes business and are now getting into the drug rackets. They own the gambling rackets in most places. The only thing left is prostitution and porn. Making money from vice makes you a pimp, no matter what you do with the money. Seeing the state fail at it is pleasing at some level.

More important, it underscores a criticism from the old right that has long been dismissed. That is, you cannot have an economy based on doing each others laundry. You have to make thinks and you have to invent things. That creates real jobs directly through employment in factories. It does so indirectly for all of the support services. It also props up the tertiary economy, like gambling and entertainment, as people use their surplus on leisure. You can’t have a real economy very long when it is based on selling off your assets to pay for leisure.

 

It’s Always Something

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People in the stock trading business always have a reason to buy stocks. If the market is falling, it is a great time to bargain hunt. If the market is soaring, you have to get in while the getting is good. A nuclear strike incinerating NYC would not be enough to discourage these guys. That’s the business. It’s a form of gambling and they are addicted to it. They love the action in the same way a base jumper loves the thrill of the activity. It’s not rational, but emotional.

CNBC exists to gaslight these types. No matter what, they can see the bright side of what is happening in the markets. Today’s revised Q1 GDP is a good example.

The U.S. economy contracted in the first quarter for the first time in three years as it buckled under the weight of a severe winter, but there are signs activity has since rebounded.

Yeah, suddenly we’re all hot house flowers incapable of handling a little snow.

The decline in output, which also reflected a plunge in business spending on nonresidential structures, was sharper than Wall Street’s expectations. Economists had expected the revision to show GDP contracting at a 0.5 percent rate.

The economy grew at a 2.6 percent pace in the fourth quarter. U.S. financial markets are likely to shrug off the report, given the temporary factors that weighed down on growth and the fact that economic activity is rebounding.

Data ranging from employment to manufacturing suggests growth will accelerate sharply in the second quarter.

Economists estimate severe weather could have chopped off as much as 1.5 percentage points from GDP growth. The government, however, gave no details on the impact of the weather.

Weather could have been a cause. Magic evil leprechauns could be the cause too. We don’t know, but let’s go with weather because we don’t think it was leprechauns.

Businesses accumulated $49.0 billion worth of inventories, far less than the $87.4 billion estimated last month.

It was the smallest amount in a year and left inventories subtracting 1.62 percentage points from first-quarter growth. But inventories should be a boost to second-quarter growth.

While the decline in exports was not as severe as initially thought, import growth was stronger. That resulted in a trade deficit that sliced off 0.95 percentage point from GDP growth.

A measure of domestic demand that strips out exports and inventories expanded at a 1.6 percent rate, rather than a 1.5 percent rate, indicating underlying strength in the economy.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased at a 3.1 percent rate. It was previously reported to have advanced at a 3.0 percent pace.

Spending was boosted by the Affordable Healthcare Act, which expanded healthcare coverage to many Americans. Consumer spending had increased at a brisk 3.3 percent pace in the fourth quarter.

Business spending on nonresidential structures, such as gas drilling, contracted at a 7.5 percent rate. It had previously been reported to have increased at a 0.2 percent pace. The report showed corporate profits after tax plunged at a 13.7 percent rate, the biggest drop since the fourth quarter of 2008.

Let’s see. Demand was higher, but profits were smaller. Business, for some reason, reduced inventories. But wait. Consumer spending was not higher on things people want like new TV’s and cars. It was higher for stuff they don’t want like health care. My goodness. Does anyone even bother to read the copy before it goes to press?

2014: The Amazon War

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A popular joke is that in the future, people will identify based on their loyalty to one of the global corporations dominating society. People will self-identify as Google or Apple or Amazon. If you are a reader, Amazon is the default bookstore. Google has your email and personal information, which they share with the state. Apple is a weird cult of people who fashion themselves tech-savvy so they insist on products requiring zero technical skill. Brand loyalty is now personal identity.

Anyway, lost in it all is Amazon is not a healthy business. By the standards of finance, the stock is over priced by a factor of 24. That’s right. They have a P/E of 487 as of right now. For a bio-tech startup, that’s OK, but for a mature business it is staggeringly high, unless they have some new invention in the works. That stock price would have to fall to $13 for the stock to be prized at a typical P/E. But, nothing about modern finance makes much sense, based on the old economics.

Amazon’s power over the publishing and bookselling industries is unrivaled in the modern era. Now it has started wielding its might in a more brazen way than ever before.

Seeking ever-higher payments from publishers to bolster its anemic bottom line, Amazon is holding books and authors hostage on two continents by delaying shipments and raising prices. The literary community is fearful and outraged — and practically begging for government intervention.

This is the sort of thing a business does when they have run out of other options. They have squeezed every cent from their supply chain. They have automated everything that can be automated. They have baffled the markets with their drone stuff, but no one is buying that much longer. They either start posting better results or there will be a rush for the exists. That does not mean they are the new Enraon, but it suggests they need to find a new thing to keep the plates spinning.

“How is this not extortion? You know, the thing that is illegal when the Mafia does it,” asked Dennis Loy Johnson of Melville House, echoing remarks being made across social media.

Amazon is, as usual, staying mum. “We talk when we have something to say,” Jeffrey P. Bezos, the founder and chief executive, said at the company’s annual meeting this week.

The battle is being waged largely over physical books. In the United States, Amazon has been discouraging customers from buying titles from Hachette, the fourth-largest publisher by market share. Late Thursday, it escalated the dispute by making it impossible to order Hachette titles being issued this summer and fall. It is using some of the same tactics against the Bonnier Media Group in Germany.

One of the under discussed facts about the “new” economy is these tech giants are mostly skimming operations and rentiers. A book from Amazon is the same as a book from Fred’s book shop. You’re not saving money on the production of the book or getting anything extra from Amazon. They make their money from convenience and that has a small premium. Much of their success depends on using networks developed by other firms, for which Amazon pays nothing.

That could be what’s coming next for Amazon and NetFlix. The ISP’s will begin throttling their services unless they pay for their usage. Those costs will be passed to the customers of these services instead of financed by everyone else. That’s the theory, but these giant firms have a lot of power, so they can probably avoid it. Money may not buy happiness, but it can buy a lot of politcal power.

But the real prize is control of e-books, the future of publishing.

Publishers tried to rein in Amazon once, and got slapped with a federal antitrust suit for their efforts. Amazon was not directly a party to the case but has reaped the rewards in increased market power. Now it wants to increase its share of the digital proceeds. The publishers, weighing a slide into irrelevance if not nonexistence, are trying to hold the line.

Late Friday afternoon, Hachette made by far its strongest comment on the conflict.

“We are determined to protect the value of our authors’ books and our own work in editing, distributing and marketing them,” said Sophie Cottrell, a Hachette senior vice president. “We hope this difficult situation will not last a long time, but we are sparing no effort and exploring all options.”

The Authors Guild accused the retailer of acting illegally.

“Amazon clearly has substantial market power and is abusing that market power to maintain and increase its dominance, which likely violates Section 2 of the Sherman Antitrust Act,” said Jan Constantine, the Guild’s general counsel.

The trouble for Amazon is they have a monopoly on things that can be duplicated, to some degree, by smaller players. Producing book, digital or analog, is not an art exclusive to Amazon. Further, Amazon does not do much to promote book sales on their platform. Further, the rest of supply chain is becoming easier to replicate on the small scale. Small business can ship just as cheap as Amazon. In other words, lots of people can start selling books on-line if Amazon becomes a problem.

Rich People on Welfare

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Welfare programs for the poor are resented by the middle-class for good reason. Money is siphoned from the taxpayer and given to people who refuse to work or obey the laws and customs of society. The welfare class, when given a chance, makes clear they do not appreciate the help and resent the fact the taxpayer expects them to be grateful. It is no wonder the middle generally resents the lower in a social democracy like America.

Welfare takes many forms. This story about Tesla is an example of how the rich get tax money shoved into their pockets.

Tesla Motors, an electric car maker backed by the U.S. Department of Energy (DOE), posted a $49.8 million loss in the first quarter of 2014. This loss compared to a profit of $11.2 million in the same period a year earlier despite selling more cars.(i) Last year’s profit was not due to electric car sales, but to sales of California zero-emission-vehicle environmental credits to other auto manufacturers. Those lucrative credits have declined and tight battery supply has made it harder to produce the carmaker’s electric vehicles.

“Sales of California zero-emission-vehicle environmental credits to other auto manufacturers” is a nice way of saying free money from the middle-class. The state forces the normal car makers to tax their customers on behalf of Tesla. The cost of those credits, after all, is a part of the cost of building cars. That cost is passed onto the consumer in the price of the car. Tesla, in effect, gets to tax every car buyer in California.

During the first quarter of 2013, Tesla received about $68 million (12 percent of revenue) from the sale of zero vehicle emission credits. Note that without the sale of these credits, the company would have lost over $50 million during the first quarter of 2013.[v] According to a Wall Street analyst, Tesla earned as much as $250 million in 2013 on their sale. Translated into dollars per vehicle, Tesla made as much as $35,000 extra on each sale of its luxury Model S electric sports sedan through state environmental credits that it sold to other auto manufacturers that need to buy credits to satisfy California regulations. Adding in the Federal tax credit of $7,500 per vehicle and a state rebate of $2,500 per vehicle, the state and federal incentives totaled as much as $45,000 per vehicle that Tesla sold for as much as $100,000, depending on the model and options.[vi]  Essentially, regular taxpayers who buy typical cars, trucks and minivans are heavily subsidizing an additional car for a clientele whose average income is just under $300,000 per year.

This is the math problem that haunts modern corporatism. Hidden taxes to subsidize unprofitable ventures looks like a great solution to the “problems” of the market. The rulers look around and say we need to be using electric cars, but the pesky market refuses to comply. That’s called a market failure. The solution to “market failure” is to form these public-private partnerships to “jump start” business like Tesla in order to “nudge” the market in the preferred direction. In theory, electric cars will become competitive at some point and then the market will take care of the rest.

There are two problems with this. One is the money spent on this hidden tax does not come from nothing. It is money that would be spent on some other good or service. These other industries go to the state looking for help for the same reason Tesla gets help. The system quickly becomes a game of whack-a-mole. The state is forever on the hunt for new Peters to rob in order to pay the growing list of Pauls. Government becomes a highwayman, robbing anyone trying to operate a business.

The other problem is the math is not zero sum. The state thinks it can supply an unlimited amount of energy to the economy, as if it is a first order perpetual motion machine. That’s no more possible in an economy than it is in physics. Eventually, the economy begins to grind to a halt or the state grinds to a halt. In California,  the state is bankrupt. Several of its cities are in bankruptcy and the state has no way to pay its pension obligations. Looks like the state will fail first.

That’s the big difference between welfare for the rich versus the poor. The poor are an annoyance. The cost of the various programs is not insignificant, but it is largely paid by the rich. The high earners pay the bulk of the taxes which cover the trillions in welfare payments. The vast web of corporate welfare, subsidy schemes like Tesla and financial shenanigans in the banking system loots the middle class. That’s what the war on the middle is intended to accomplish. That’s why the middle-class is disappearing.

James Logan: Patent Troll

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Way back in the olden thymes I had one of those conversations familiar to anyone in the tech world back then. The web was just getting going and everyone was putting up websites hoping to get rich. Someone I knew was involved in one such venture. He was giving me the elevator speech about how it was positioned to take advantage of synergies and vectors and so on.

After he was done I asked him how they planned to make money. I was not being cheeky, I just assumed he left that part out for some reason. Instead of telling me, he went into another spiel about unique visitors per month and page visits. My reply was something about the bank not taking page visits as payment on his mortgage. He thought I was daft, but not long after, the venture collapsed.

The great challenge of the tech boom was figuring out how to make money from things people did not need, but they could possibly want. Some services like porn figured it out for a while. Others like eBay and PayPal came up with real businesses to replace existing businesses. Others figured out how to transfers big chunks of their costs onto some unsuspecting sucker like the ISP.

Others figured out how to tax you through your phone bill or tax the person with who you were doing e-commerce. These parasites were not looking to add value to the system, but rather extract value. This is where patent trolls come into play. They shake down companies for rents, abusing the patent laws. They are just gaming the legal system to control an artificial bottleneck. That’s the racket of dirtbags like James Logan.

James Logan freely admits that he’s never made a podcast.

But he also insists he helped create the medium of podcasting. Logan says that it happened in 1996 — and that he has the patents to prove it.

In a controversial legal battle, PersonalAudio, the company founded by Logan, is suing comedian Adam Carolla’s ACE Broadcasting, two other podcasters and networks Fox, CBS and NBC, saying they are infringing on his copyright and owe him money.

The trial begins in September. Carolla has taken to the Web to raise money for legal fees against what he called “patent trolls.”

Carolla says he needs $1.5 million to face PersonalAudio in an East Texas courtroom that historically has been favored by patent litigants. So far, Carolla has pulled in just over $370,000 on the Fundanything.com crowdfunding website, including a $20,000 donation from e-commerce giant Amazon.

“The first thing they (PersonalAudio) said was ‘Give us $3 million,'” says Carolla, whose show is listed in the Guiness Book of World Records as the most downloaded podcast ever. When faced with the suit, Carolla said he chose to fight.

“Obviously, $3 million is out of the question,” he says. “But even if they said tomorrow, ‘Give us $100,000, and this will all go away’ — $100,000 for what?”

Should he lose, Carolla says he might shut down his show, a sentiment seconded online by others.

Podcasting has been around since at least 2004, initially as a vehicle to supply non-music programming for the Apple iPod, which launched in 2001. Apple began offering podcasts, through subscriptions and downloads, via its iTunes app in 2005.

As the popularity of smartphones and tablets has eliminated the need for subscriptions and downloads, sites such as TuneIn Radio, SoundCloud, Stitcher and Swell offer instant listening, both on the Web and via increasingly popular smartphone apps.

Nerdist’sChris Hardwick built a huge online following with his podcast, which he parlayed into a high-profile hosting gig with cable network AMC. Comedian Aisha Tyler, a co-host of TV’s The Talk, parlayed her popular podcast Girl on Guy into a best-selling book, Self-Inflicting Wounds. National Public Radio has found huge audiences for shows such as This American Life, Snap Judgement and Fresh Air, which regularly top the iTunes podcast charts.

The trials — six separate suits between PersonalAudio and Carolla, Discovery Networks, podcaster Togi Entertainment and the broadcast networks — will take place in a small Texan town with 24,000 residents. Marshall, three hours east of Dallas and near the Arkansas border, has become known as the “patent trial capital”, a popular place to get a trial in a city whose docket isn’t filled with other cases waiting to get a hearing.

Many patent cases take place there, and historically, litigants win 60% of the time, according to a recent study by PriceWaterhouseCoopers.

Carolla’s team fought the locale, seeking a bigger city and fearing the history.

PersonalAudio, based in Beaumont, Texas, has a handful of employees working on creating new technologies, says Logan, who himself is based in New Hampshire.

PersonalAudio has no products but instead owns patents and investments in several companies, including consumer tech company Bringerr.

Logan’s 1996 idea predates podcasting as we know it. His concept was downloadable entertainment via the Internet to a new kind of MP3 player he was trying to market. The product fizzled, so he switched gears to subscription of cassette tapes. He filed for and was granted several patents, which included the notion of having downloaded playlists.

In 2009, PersonalAudio amended the patent to include podcasting.

It is patently obvious this guy is adding nothing to any of these companies. They are not using his technology. He has not created anything unique or original that they are relying upon to do their work. He is good at fooling stupid government clerks in the patent office into giving him rights to things he never created. His entire business is built around the idea of finding someone he can sue in a courtroom full of rubes.

That’s the main problem with these patent suits. Their claims have no relationship with the real value of their product. Carolla would never pay $3 million to this idiot in order to record a podcast. He probably would not pay anything. Instead he would find some other way to do his show without using whatever it is this guy claims he owns. James Logan is simply a highwayman, one that robs you on the internet.

Piketty Ninnies

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David Brooks is a useful guy to watch at the moment, as he is popular with the managerial class. His book, Bobos in Paradise, is an excellent bit of cultural observation.  He knows his peers well and often does an excellent job describing their habits and world view. It is also why he sounds like a space alien when he addresses issues facing common Americans. Still, he scores with a column or two a year and this is one such example.

Many people join the political left driven by a concern for the poor. But, over the past several years, the Democratic Party has talked much more about the middle class than the poor. Meanwhile, progressive political movements like Occupy Wall Street directed their fervor at the top 1 percent. Progressive movies and books have focused their attention on conspiracy and oligarchy at the top, not “Grapes of Wrath” or “How the Other Half Lives” stories at the bottom.

This is natural. The modern left is led by smart professionals — academics, activists, people in the news media, the arts and so on — who tend to live in and around coastal cities.

If you are a young professional in a major city, you experience inequality firsthand. But the inequality you experience most acutely is not inequality down, toward the poor; it’s inequality up, toward the rich.

You go to fund-raisers or school functions and there are always hedge fund managers and private equity people around. You get more attention than them at parties, but your whole apartment could fit in their dining room. You struggle with tuition, but their kids go off on ski weekends. You wait in line at the post office, but they have staff to do it for them.

You see firsthand the explosion of wealth at the tippy-top. It really doesn’t help that you have to spend your days kissing up to the oligarchs and their foundations to finance your research, exhibition or favorite cause.

And right there he touches on precisely why a hitherto unknown economist named Thomas Piketty is taking the beautiful people by storm. The people writing at the NYTimes, teaching at big state universities and carrying bags for elected officials have grown resentful of their masters. They look around at lottery winners like Mark Zuckerberg and wonder why he gets to live like an 18th century French royal, while they toil in his fields. After all, they went to an Ivy League college too.

Obama declared inequality as “the defining issue of our time.” Obama is a spokesman, so he is a useful indicator about what vexes these people. His writers and teleprompter operators are members of the managerial class. What’s important to them will eventually turn up in one his carefully choreographed speeches. With an election coming and the Left on its heels, it is a safe bet they will be pounding this drum for the rest of the year in an effort to change the subject.

“defining challenge of our time.”
“defining challenge of our time.”
“defining challenge of our time.”

There may be something else going on here. If you look back at the last fifteen years, the period of this last Great Awakening of Progressive fanaticism, they don’t have a whole lot to show for themselves. In the 2000’s, it was mostly an extended tantrum about the unlettered rubes of the Bush administration. The Obama years have been a big disappointment to the Left. The great dreams of 2008 have been boiled down to one major initiative, health care, which has been a terrible flop.

If you are a member of the ruling class, it feels bad right now. The triumph of Obama is a distant memory and all the promise of that time amounted to nothing. More broadly speaking, this last fevered push by the Left never had much going for it. Health care is a math problem, not a moral problem. The rest of their agenda amounts to nothing more than weird fads cooked up by intersectional college professors with too much time on their hands. It’s been a total bust

The other side of the coin is the Right has nothing to offer. Conservatism in America has mostly functioned as a brake on the Progressives. Every once in a while they come up with a good policy and aggressively promote it, but for the most part they are the party-poopers telling the Left they can’t have what they want. Right now, the Left is exhausted and the Right has nothing to champion. That’s why the so-called conservatives sound like a bizarre mystery cult built around Reagan and buckley.

Ideologically, we are at a dead end. With no way forward, going back and re-arguing inequality suits both sides well. The real issue of this age, the demographic issue, is forbidden due to the dictates of egalitarianism. Since that is the only issue that actually matters, they are left talking about trivial and made up stuff. That and their feelings about one another, which is the root of the inequality stuff. The house servants are getting restless with nothing better to do.

Whoops!

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The Left was preparing to re-run the Summer of Recovery to boost their electoral chances this fall. The fourth quarter GDP was not horrible, but not great either. All of the usual suspects had convinced themselves that the economy was finally getting off the mat and headed for a boom. Unemployment claims we slowing and the number of posted jobs was increasing. Happy days were here again!

Maybe not:

The U.S. economy slowed drastically in the first three months of the year as a harsh winter exacted a toll on business activity. The slowdown, while worse than expected, is likely to be temporary as growth rebounds with warmer weather.

Growth slowed to a barely discernible 0.1 percent annual rate in the January-March quarter, the Commerce Department said Wednesday. That was the weakest pace since the end of 2012 and was down from a 2.6 percent rate in the previous quarter.

Many economists said the government’s first estimate of growth in the January-March quarter was skewed by weak figures early in the quarter. They noted that several sectors — from retail sales to manufacturing output — rebounded in March. That strength should provide momentum for the rest of the year.

That’s right, the weather. It is usually sunny and warm in winter but for some strange reason it was cold this winter. That’s why everyone stopped doing stuff.

And on Friday, economists expect the government to report a solid 200,000-plus job gain for April.

America adds about 2 million people to the adult population each year, after accounting for deaths and immigration. That means the job market has to grow accordingly. Adding 200,000 jobs a month is treading water. That’s why this graph never gets on TV:

But hey, why not bring in another twenty or thirty million Latino peasants to do the jobs Americans won’t do? That’s fix this stagnant economy!

Shrinkage

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One of the truths about the modern economy is that it encourages the sorts of deception the old economy considered fraud. This story from CNBC in “shrinkflation” is a good example. The very short version is retailers are shrinking their products while keeping the price the same. This games the inflation numbers. A candy bar may remain $1.25, but it is 80% of its original size. The bag of sugar at the market went from five pounds to two kilos, which is roughly 4.5 pounds.

That last trick is common with beverages. A fifth of liquor is now sold as 500ML. A fifth is roughly 25 ounces, while 500ML is 17 ounces. They will mess with the shape of the bottle so it tricks the eye. This may sound like a small thing, but consider this. The tax on alcohol is roughly $23 per gallon. That means the booze maker saves $1.30 on taxes, plus the cost of tax collection and the cost of manufacturing his product. Multiply that over a million bottles and you have real money.

Since most people don’t alter their eating habits all that much, they tend to notice that the food bill is slowly going up. If it was showing up on the price of product, people would notice it. When it happens this way, it is hard to detect. That’s the fundamental dishonesty at work. We live in a time when lying about everything is so common, no one notices. Ours is a dishonestly culture. Not only is lying tolerated, it is celebrated as the very pinnacle of business ethics.

This is not a new phenomenon. The old economy used to have examples of how this sort of dishonestly was self-defeating. The example that used to be used to teach was the pickle maker who hired a new plant manager. Soon, the plant was much more profitable so the owner went to see how it was done. The manager told him how he increased profits by removing one pickle from each jar. That means every ten jars netted him one free jar of pickles he could sell.

The owner fired his manager. The reason was the manager was not just cheating the customers, he was cheating the owner. The “savings” were eventually going to cost the owner business. In other words, they were not savings, they were accrued costs. Somewhere down the line that accrual would reverse out and someone would have to pay, most likely the owner. This is the most basic form of intergenerational theft. That’s spending tomorrow’s profits today. It creates a liability that has to be paid tomorrow.

The fact that the food makers are lying to us is not surprising. The standard has been set by public officials who lie so much it is impossible to know the truth. They lie on spec, as the gangsters say. Politicians have always lied, but it became the centerpiece of their morality in the Clinton years. Aggressively trying to fool the public was normalized in that period. As a result, no one can trust anything said in public. These everyone free to emulate the ruling class and lie about everything.

That last bit is not always obvious either. In a world where there is no truth, you can easily miss what’s happening. In the last election, Herman Cain was driven from the field because he liked getting freaky with co-workers. The people shrieking in outrage, however, spent the 1990’s defending a man who was a serial rapist and was impeached for shoving cigars into fat interns. The same people who lionized Hillary Clinton for sticking by her man, mocked Cain’s old lady or doing the same.

The Founders understood this and worked to shape public institutions that were weak, so they would not warp the culture. They also worked to make it tough for one religion to dominate the rest. The theory being that if no one could hope to have control of the public institutions, they would work to prevent others from it and the result would be a preservation of republican government. They never anticipated what was going to come from the radical reformers we call Progressives.

It is comforting to think that there is a limit to this. You can only shrink the food so far, before the containers are empty.. You can only hide the money creating and debt spiral for so long. Mathematics says there are limits and once those limits are reached, the game is up. It may be comforting to think there are still enough citizens willing to fight to keep the country, but that’s probably a fantasy.

The overwhelming majority want the custodial state and will fight anyone who tries to stop them. No matter how much and how often the Left lies to them, they will trust the Left before they trust themselves. That means the only way through this dynamic of institutional dishonestly is some form of crisis. When the liars are no longer able to keep the lights on, the public will turn to a truth teller. That truth teller will be an autocrat who promises to restore order and dispose of the radicals.